accounts- chapter 2 soltutions

8/12/2019 Accounts- Chapter 2 Soltutions

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CHAPTER 2ACCOUNTING FOR TRANSACTIONS

Key Terms and Concepts to Know

Doubleentry accounting:Debits and CreditsTotal debits must always equal total credits

Accounting Books:Accounts

General JournalGeneral Ledger (T account)Chart of Accounts

Business Transactions:Impact on the accounting equationImpact on accounts and financial statementsJournalizing (Recording) transactions in the General JournalPosting (Recording) Transactions from the General Journal to the General Ledger

Trial Balance:Prepare a Trial BalanceUse the trial balance to prepare financial statementsFind and correct errors using the trial balance

Debt Ratio


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Key Topics to Know

Debits and Credits

DEBIT SIDE CREDIT SIDE

After Assets Lets LiabilitiesEating Expenses Read Revenues and

Retained EarningsDinner Dividends Comics Capital Stock

Assets, Expenses and Dividends Liabilities, Revenues and Capital StockNormal balance on the DEBIT side Normal balance on the CREDIT side

Increase on the DEBIT side Increase on the CREDIT sideDecrease on the CREDIT side Decrease on the DEBIT side

Journals and Ledgers

Example #1:1) Journalize the transactions below using the following account titles:

Cash Capital Stock Rent expense

Accounts Receivable Dividends Automobile expenseSupplies Sales Commissions Supplies expenseAccounts Payable Office Salaries Expense Misc. expense

2) Prepare T-accounts and post the entries to the appropriate accounts. Determinebalances after all entries are posted.

a) Issued capital stock for $16,000.b) Paid rent on office building for the month, $3,000.c) Purchased supplies on account, $1,200.d) Paid creditor on account, $800.e) Earned sales commissions and sent invoices to customers, $22,500.f) Paid automobile expenses for month, $2,900, and miscellaneous

expenses, $1,450.g) Paid office salaries, $4,200.h) Determined the cost of supplies used was $960.i) Paid cash dividends, $1,400.


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Solution #1a) Cash 16,000 Capital Stock 16,000b) Rent Expense 3,000 Cash 3,000c) Supplies 1,200 Accounts Payable 1,200d) Accounts Payable 800 Cash 800

e) Accounts Receivable 22,500 Sales Commissions 22,500

f) Automobile Expenses 2,900 Misc. Expenses 1,450

Cash 4,350

g) Salaries Expense 4,200 Cash 4,200h) Supplies Expense 960 Supplies 960

i) Dividends 1,400 Cash 1,400


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Cash A/R Supplies

a) 16,000 3,000 b) e) 22,500 c) 1,200 960 h) 800 d)

4,350 f)4,200 g)1,400 i)

2,250 22,500 240

A/P Capital Stock Dividends

d) 800 1,200 e) 16,000 c) i) 1,400400 16,000 1,400

Sales Commission Salaries Expense Rent Expense

22,500 e) g) 4,200 b) 3,00022,500 4,200 3,000

Auto Expense Supply Expense Misc. Expense

f) 2,900 h) 960 f) 1,4502,900 960 1,450

Practice Problem #1: Journalize each of the following transactions in a two-columnjournal and post the entries to T-accounts. Use the chart of accounts below.

Cash Accounts Payable Rent ExpenseAccounts Receivable Capital Stock Utilities ExpenseSupplies Dividends EquipmentPrepaid Insurance Fees Earned

a) Issued capital stock for cash, $27,500b) Paid rent on office for month, $2,500c) Purchased office supplies for cash, $2,225d) Paid insurance premiums, $1,500e) Purchased office equipment on account, $10,000f) Received cash for services completed, $3,800g) Received an invoice for utilities, $475h) Billed customers for services completed, $1,800i) Received cash from customers on account, $900) Paid $4,200 on accountk) Paid cash dividends, $2,800


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Trial BalanceExample #2:The debit and credit totals of the following trial balance are unequal as a result of thefollowing errors. Prepare a corrected trial balance as of June 30 of the current year.

Cash $26,500Accounts Receivable 37,775Prepaid Insurance 800Office Supplies 960Accounts Payable $11,410Notes Payable 6,000Capital Stock 7,500Retained Earnings 25,340Dividends 2000Fees Earned 126,500

Wages Expense 84,100Rent Expense 5,500Advertising Expense 3,900Automobile Expense 275Miscellaneous Expense 1,550

otals $161,360 $178,750

Errors noted:a) he balance of cash was understated by $750. (Cash +750)b) A cash receipt of $2,100 was posted as a debit to Cash of $1,200.

(Cash +900)c) A debit of $3,000 for a cash dividend was posted as a credit to

Retained Earnings. (Dividends +3,000; RE 3,000)d) he balance of $2,750 in Automobile Expense was entered in the trial

balance as $275. (Auto Exp. = 2,750)e) A debit of $975 to Accounts Receivable was not posted. (A/R +975)f) A return of $125 of defective supplies was erroneously posted as a

$215 credit to Supplies. (Supplies +90)g) An insurance policy acquired at a cost of $150 was posted as a credit to

Prepaid Insurance. (Prepaid Ins. +300)h) A debit of $900 in Accounts Payable was overlooked when determining

the balance of the account. (A/P 900)i) he balance of Notes Payable was overstated by $5,000. (Notes

Payable 5,000)) he balance of cash was understated by $750. (Cash +750)k) A cash receipt of $2,100 was posted as a debit to Cash of $1,200.

(Cash +900)


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Solution #2:

Corrected Trial BalanceCash $28,150Accounts Receivable 38,750Prepaid Insurance 1,100

Office Supplies 1,050Land 0Accounts Payable $10,510Notes Payable 1,000Capital Stock 7,500Retained Earnings 22,340Dividends 1,000Fees Earned 126,500Wages Expense 84,100Rent Expense 5,500

Advertising Expense 3,900Automobile Expense 2,750Miscellaneous Expense 1,550

otal $167,850 $167,850


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Practice Problem #2: The debit and credit totals of the following Trial Balance areunequal as a result of the following errors. Prepare a corrected trial balance as ofSeptember 30 of the current year.

Errors noted:a) he balance of cash was overstated by $850.b) A cash payment of $3,600 was posted as a credit to Cash of $6,300.c) A debit of $3,000 for a cash dividend was posted as a credit to Delivery

Expense.d) he balance of $8,900 in Advertising Expense was entered as $890 in the

Trial Balance.e) A credit of $250 to Accounts Receivable was not posted.f) A purchase of $250 in supplies was posted as a credit to Supplies.g) he balance of Retained Earnings was overstated by $1,500.h) An insurance policy acquired at a cost of $315 was erroneously posted as

a $135 debit to Prepaid Insurance.

i) Rent Expense, with a balance of $19,000 was omitted from the trialbalance.

) A credit of $700 in Accounts Payable was overlooked when determiningthe balance of the account.

rial BalanceCash 27,650Accounts Receivable 38,850Prepaid Insurance 570Supplies 125Land 0Accounts Payable 12,550Capital Stock 15,000Retained Earnings 49,525Dividends 7,000Fees Earned 158,725Salary Expense 123,075Advertising Expense 890Delivery Expense 950

Miscellaneous Expense 600otal $199,710 $235,800


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Sample True / False Questions

1. A list of all account names used to record transactions of acompany is referred to as a T-account.rue False

2. After recording each transaction, total assets must equal totalliabilities plus stockholders' equity.rue False

3. Borrowing cash from the bank causes assets to increase andliabilities to increase.rue False

4. Providing services to customers for cash causes stockholders'equity to increase.rue False

5. Receiving cash in advance from a customer for services to beprovided in the future causes assets to increase and stockholders'equity to increase.rue False

6. Expenses have the effect of decreasing retained earnings.rue False

7. he Dividends account increases with a credit and decreases witha debit.rue False

8. A journal provides a chronological record of all transactionsaffecting a firm.

rue False

9. A credit to an account balance always results in the balancedecreasing.rue False

10. For each transaction, there must be at least one debit amount andone credit amount.rue False


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11. Paying employees' salaries for the current period is recorded witha debit to Salaries Expense.rue False

12. he general ledger includes all accounts used to record thecompany's transactions.rue False

13. he process of transferring the debit and credit information fromthe journal to individual accounts in the general ledger is calledjournalizing.

rue False

14.A trial balance is a list of all accounts and their balances at aparticular date, showing that assets equal liabilities.

rue False

15. If total debits equal total credits in the trial balance, then allbalances are correct.rue False

16. Financial statements are prepared from the general ledger.rue False

17.A trial balance is prepared only once in the accounting cycle.rue False

18. he debt ratio is total assets divided by total assets.rue False

19. he higher the debt ratio, the more risk of the company not beingable to repay its liabilities.rue False

20. Financial leverage measures the degree to which the company hasborrowed funds to acquire assets.rue False


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Sample Multiple Choice Questions

1. Accounts:a)Are records of increases and decreases in individual financial

statement items.b)Are only used by large entities with many transactions.c) Do not reflect money amounts.

d)Are used only by entities that manufacture products.2. Which of the following accounts is an asset account?

a) Dividendsb)Accounts Payable

c) Equipmentd) Salaries Expense

3. Which of the following accounts is a liability account?

a) Dividendsb) Cashc) Accounts Payable

d) Capital Stock4. he gross increase in stockholders equity attributable to business

activities are called:a) Dividendsb) Revenuesc) Expensesd) Assets

5. he debit side of an account: a) Is the right-hand side of the account. b) Is the left-hand side of the account. c) Depends on whether the account is an asset, liability, or

stockholders equity.d) Can be either side of the account depending on how the

accountant set up the system.

6. A debit may signify a(n): 1. Increase in asset accounts 2. Increase in liability accounts 3. Increase in the capital account 4. Decrease in expense accounts


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13. he process of initially recording a business transaction is called: a) Sliding

b) Postingc) Journalizingd) ransposing

14. Which of the following entries records the payment of rent for thecurrent month?a) Cash, debit; Rent Expense, credit

b) Rent Expense, debit; Cash, credit c) Rent Expense, debit; Accounts Payable, credit d)Accounts Payable, debit; Rent Expense, credit

15. Which of the following entries records the collection of cash fromcash customers?

a)Accounts Receivable, debit; Fees Earned, creditb) Fees Earned, debit; Accounts Receivable, creditc) Fees Earned, debit; Cash credit

d) Cash, debit; Fees Earned, credit

16. he verification that the sum of the debits and the sum of thecredits in the ledger are equal is called:a)A journalb)A ledgerc) Postingd)A trial balance

17.An error was discovered in computing and paying the wages of anemployee of Allen Appliance Repair. Allen received cash from theemployee for the amount of the overpayment. Which of thefollowing entries for Allen records this transaction?a) Wages Payable, debit; Wages Expense, credit

b) Wages Expense, debit; Wages Payable, credit c) Wages Expense, debit; Cash, credit d) Cash, debit; Wages Expense, credit

18. If an expense is incurred but not paid, then a) Liabilities will increase b) Stockholders equity will increase c) Assets will decrease d) Expenses will decrease


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19. Which of the following errors, each considered individually, wouldcause the trial balance totals to be unequal?a)A payment of $248 to a creditor was posted as a debit of $248

to Accounts Payable and a debit of $248 to AccountsReceivable.

b) Cash received from customers on account was posted as adebit of $450 to Cash and a credit of $450 to Accounts Payable.

c)A payment of $79 for supplies was posted as a debit of $97 toSupplies and a credit of $97 to Cash.

d)A transaction was not posted.

20.Accounts with normal debit balances include: a)Assets and liabilities b) Liabilities and expenses c) Stockholders equity and revenues d) Expenses and assets

21.Accounts with normal credit balances include: a)Assets and liabilities b) Revenues and expenses c) Liabilities and revenues d) Revenues and assets

22. he process of transferring entries from the journal to the ledgeris called:a) Journalizingb) ransferringc) Postingd) Balancing

23. he entire group of accounts maintained by a company iscollectively referred to as the:a) Ledgerb) Journalc) Financial statements d) Basic equation

24. he chart of accounts lists a companys accounts in what order? a) Assets, liabilities, revenues, expenses, stockholders equity b) Assets, revenues, expenses, liabilities, stockholders equity c) Assets, liabilities, stockholders equity, expenses, revenue

d) Assets, liabilities, stockholders equity, revenues, expenses


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25. When a trial balance balances, it is an indication that:a)All journal entries have been posted.

b) he account balances are correct. c) Debits equal credits. d)All transactions have been journalized.

26.Accounts are listed on the trial balance in: a) Chronological order b) he order that they appear in the ledger c)Alphabetical order d) he order in which they are posted


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SOLUTIONS TO PRACTICE PROBLEMS

Practice Problem #1a) Cash 27,500 Capital Stock 27,500b) Rent Expense 2,500 Cash 2,500c) Supplies 2,225 Cash 2,225d) Prepaid Insurance 1,500 Cash 1,500e) Equipment 10,000 Accounts Payable 10,000f) Cash 3,800 Fees Earned 3,800g) Utilities Expense 475 Accounts Payable 475h) Accounts Receivable 1,800 Fees earned 1,800i) Cash 900 Accounts Receivable 900) Accounts Payable 4,200 Cash 4,200k) Dividends 2,800 Cash 2,800


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Cash A/R Supplies

a) 27,500 2,500 b) h) 1,800 900 i) c) 2,225f) 3,800 2,225 c)i) 900 1,500 d)

4,200 j)2,800 k)

18,975 900 2,225

A/P Capital Stock Dividends

) 4,200 10,000 e) 27,500 a) k) 2,800475 g)400 27,500 2,800

Fees Earned Utilities Expense Rent Expense

3,800 f) g) 475 b) 2,5001,800 h)5,600 475 2,500

Prepaid Insurance Equipment

d) 1,500 e) 10,0001,500 10,000


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Practice Problem #2

Corrections required:a) Cash -850b) Cash +2,700c) Dividend +3,000; Delivery Expense +3,000d) Advertising Expense change to 8,900e) A/R 250f) Supplies +500g) Retained Earnings 1,500h) Prepaid Expenses +180i) Rent Expense should be included at $19,000) A/P +700

Corrected Trial BalanceCash $29,500Accounts Receivable 38,600Prepaid Insurance 750Supplies 625Land 0Accounts Payable $13,250Capital Stock 15,000Retained Earnings 48,025Dividends 10,000Fees Earned 158,725Salary Expense 123,075Rent Expense 19,000Advertising Expense 8,900Delivery Expense 3,950Miscellaneous Expense 600

otal $235,000 $235,000


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SOLUTIONS TO TRUE / FALSE QUESTIONS

1. False - this is referred to as a chart of accounts.2. rue3. rue4. rue5. False - assets increase and liabilities increase.

6. rue7. False - the Dividends account increases with a debit and decreases

with a credit.8. rue9. False - a credit decreases assets, dividends, and expense, but

increases liabilities, stockholders' equity, and revenues.10. rue11. rue12. rue13. False - the process is called posting.14. False - the trial balance shows that total debits equal total credits.15. False - a trial balance could contain offsetting errors where the

balance of one account is misstated in one direction but thebalance of another account (with the same type of debit or creditbalance) is misstated in the other direction.

16. False financial statements are prepared from a trial balance.17. False trial balances may be prepared before and after adjustingentries are prepared and after the closing process has beencompleted.

18. False the debt ratio is total liabilities divided by total assets.19. rue20. rue


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SOLUTIONS TO MULTIPLE CHOICE QUESTIONS

1. A2. C3. C4. B5. B6. A7. B8. A9. A10. A11. A12. C13. C14. B15. D16. D17. D18. A19. A20. D21. C22. C23. A24. D25. C26. B

accounts- chapter 2 soltutions

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